We May Not Be Maximising The ROI From Our Operations
Not getting the maximum Return On Investment (ROI)can reflect on you as a senior executive. If you’re hired to run a factory, warehouse, major asset or complex operation and it is functioning badly, it reflects on you personally from the company’s perspective.
This can make you look like a suboptimal manager, like you don’t know what you’re doing, when, in fact, you probably are pulling all the right levers from the information you have at hand. But if the information is poor, or not timely, then you will likely make poor decisions.
The survival rate of an executive who is starting to threaten the lifespan of the company because he hasn’t got the operations under control is normally low. This can cost you your job—that is a common outcome for senior positions as we all know.
The cost to the company can come via high labour costs, low efficiency, poor reliability of the plant, or even surprises during capital upgrade work. How badly they’re impacted depends on the company.
If it’s a contracting company, having their projects under control is important. If it’s a manufacturing company, having their manufacturing systems and warehouse maintained and up-to-date is important. If it’s a service business, having an efficient field force, or optimal asset utilisation is critical.
Operations can cover a multitude of things. If you’re a large asset owner, it’s about getting your reliability high and your maintenance costs under control. An added dimension is a large government-owned asset and critical infrastructure that is owned by the taxpayer. In this situation, their maintenance costs and level of reliability can make or break the organisation. Of course, in the case of a large government-owned asset, they are likely to be bailed out using taxpayers’ money because the country needs the services of that asset or infrastructure.
Even if the government does bail out the situation, or another company takes over, people have still lost their jobs, and there are interruptions to the services that hundreds, thousands or millions of people are relying on.
The stakes are very, very high in keeping operational costs under control, and realiability in check. No matter what type of business you are, operational excellence could determine the success and sustainability of your business.
But Wait, There’s More
Not having your operations under control looks different for each company. Here are two examples I’ve seen in two different industries where the result was the same: ROI was impacted by cost of operations.
In the first example, I consulted with a medium-sized company whose main business was selling and initializing building control systems. They had service technicians who would go out in the field servicing their control solutions in the buildings where they had been installed, and they also had the capability to maintain other companies’ solutions. But they weren’t charging enough—all their labour costs were not current.
What it cost to have a technician in the field was about a third more than they thought it was. They also didn’t understand the cost of the materials the technicians were using. The materials were costed incorrectly, and they didn’t have the right quantity of materials (their bill of materials—BOMs—were inaccurate).
As a result, they weren’t charging the customer enough to cover the cost of their operations. To compound the situation further, they also didn’t effectively manage the field crews and call-outs.
In the second example, I worked with a secondary processing manufacturer that was losing money because they didn’t have their production systems under control. They were running smaller batches than they should have been to placate the relationships with their customers and the sales team. Promises were being made to their customers without thinking about effect on the cost of production, such as small bespoke batches to customers at very short notice.
Although this was being done with the best of intentions, of course, as part of a customer relationship strategy, this made the production line change from one product to another far too frequently. Their production runs were too short to give optimal manufacturing efficiency. It was costing the company lost production time and increased inventory. This was difficult to track to the individual sale and, therefore, impossible to price correctly.
Not only did it create inefficiencies in the process itself, but there was also a lot of wasted material. The machines themselves spent too much time not producing because they were changing from one product to another and there was significant waste in the yield from raw material to finished goods, due to the high number of pattern changes.
I was called in to assist, and our approach was to focus on balancing the demand management processes and customer expectations with the operational demands of running a more efficient and sustainable process. The outcome was a significant increase in manufacturing efficiency and operating yield, reduced inventory levels and increased delivery performance from the customer’s perspective.
No matter what industry or sector your company is in, it’s well worth a thorough investigation into your operational processes and costs if you truly want to maximise your ROI.